Don't expect rent refund for 'illegal' lease

Q: If my landlord is required by the city to obtain a business license in order to have rental properties, but chooses not to, is the lease agreement that I signed with her a legal and binding contract? It seems to me that if she is running an illegal business, she can't enter into contracts that bind her business. --Steven D.

A: The gist of your theory is that failing to get the legally required business license means she is running an illegal business, which means her business contracts are unenforceable. I don't think you would likely prevail with this argument.

A court will void a contract if it is illegal, or the parties were defrauded. Let's take the first possibility: An illegal contract is one:

with an illegal purpose (such as a contract for the purchase of cocaine)

in which the consideration, or payment, is illegal (for example, paying with stolen merchandise or funds); or

both, like an extortion agreement (obtaining money or property by threat to a victim's property or loved ones, intimidation, or false claim of a right, such as pretending to be an IRS agent).

A fraudulent contract is one in which an important term has been deliberately misrepresented or a party has been deliberately misled. For example, a landlord who rents a house for immediate occupancy, but fails to mention that the current tenants have refused to move and have forced the landlord to file for eviction, has seriously misled his would-be tenants. They could probably walk away from the lease without owing any money, no matter what the lease says or doesn't say about the landlord's obligations.

Your landlord's lease doesn't fit into any of these scenarios. There are other reasons for courts to invalidate contracts, however. If the contract violates public policy, particularly if it's a policy intended to protect one of the contracting parties, it won't be enforced. The best example of this is a usurious loan agreement (one that charges exorbitant interest). Your issue doesn't seem to fit into this category either.

Perhaps the better way to think about the validity of your lease is to consider why cities have imposed license requirements. For some cities, the requirement is purely a revenue-generating scheme, with licenses granted to every landlord who applies for one, regardless of the quality of that landlord's business practices or the suitability of the rental properties. Other ordinances couple the fee with oversight, requiring landlords to submit to inspections and attend classes on how to comply with landlord-tenant laws before they're granted the license.

Let's suppose that the licensing scheme in your city is of the first type, just a way to generate income for the city. Because the license isn't tied to protecting any tenant rights or encouraging good landlord behavior, a landlord's failure to get one is rather a non-event, as far as the tenant is concerned, and I doubt that a lease would be voided for this reason.

In other words, by failing to get the license, the landlord has simply violated a local ordinance. If she failed to file tax returns, a federal requirement, she'd also be a "lawbreaker," but that would not invalidate the leases she had created.

But if getting a license requires passing inspections and getting educated, sidestepping a licensing requirement might be significant as far as the tenant is concerned. Even if a landlord doesn't falsely represent that she's obtained a license, a tenant might be justified in assuming that she has done so. When the tenant learns that there's been no inspection, particularly if the property is substandard, the tenant might have grounds to not only complain about the conditions (he can always do that), but also to treat the contract as void.

Keep in mind that even if the lease is voided, a court would not allow "unjust enrichment." For example, a tenant would not normally be entitled to the return of rent already paid for time the tenant spent living in the rental.

Q: Our lease included a clause in which we agreed to a separation fee of two months' rent, after 60 days' notice, if we moved out early. We bought a house in October, gave notice (and paid rent) on Nov. 1, and moved on Nov. 15. The landlord re-rented the apartment almost immediately, with a new tenant set to move in on Jan. 10. While we're certainly prepared to pay rent through Jan. 10, we bristle at the thought that the landlord will be collecting double rent for the period of Jan. 10 to March 1 (when our separation fee runs out). Is this legal? --Alex H.

A: In most states, landlords are required to "mitigate damages" when tenants break a lease with no legal justification. This means that they must make reasonable efforts to re-rent the unit, and once they find a new tenant, the original tenant's responsibility for the balance of the rent ends.

The majority of these states have announced their rule in a statute, which may include a statement advising landlords and tenants that any attempt to contract away this duty will not be enforced by the courts. You can see why legislators would add this protection: It hardly does a tenant any good if a landlord can present the tenant with a lease that waives an important right the legislature sought to establish, especially because landlords are so often in the driver's seat when negotiating leases and rental agreements. The contract you signed requires that you pay four months' rent after giving notice, regardless of the landlord's success in finding a new tenant.

In some states, however, including New Jersey, Ohio and Utah, the mitigation rule is a common law rule: one that is contained in a court opinion, fashioned by judges after they have studied their state's historical treatment of the issue. These states are less likely to have a companion "you can't waive this" rule, because unless the question of waiver was part of the case, a court will usually not go out of its way to pass judgment on issues not before it. When courts reach the waiver issue, they may invalidate the waiver on the grounds that depriving a tenant of the benefit of the mitigation requirement is against public policy.

Let's assume for now that you're in the latter category: You've got the protection of the mitigation rule, but no clear legislative or judicial prohibition against waiving it. You may be in for some creative lawyering -- calling upon your state's consumer protection laws, for example -- to invalidate this contract. You might find some help in similar cases. You may learn, for example, that a court in your state has ruled that waiver is not allowable in a commercial leasing context.

By extension, the same rule ought to apply to residential leases, you'd argue. In fact, you can make a pretty strong case for extension, pointing out that residential tenants are likely to have less opportunity to negotiate their leases and get such a clause taken out. When parties to a contract (including a lease) have no meaningful way to negotiate its terms, the contract becomes one of "adhesion," which many courts are loath to enforce.

COMMENTS

Comments 1 - 6 of 6

1. Anonymous said... on Sep 10, 2013 at 09:51AM

“Im a single mother of three so when i moved in my apartment in the fishtown/pirt richmond area and found a huge apartment i was eager to sign my lease. My landlord seemed awesome at first. Than the refrigerater that was said to be included was leaking huge amounts of water by the 3rd day moving in , it took him 2 weeks to even come look at it and than almost a month after that he finally bought a new one . Then I showed him my oven door will not close not only are 2 out of my 3 kids toodlers making it a safety issue my gas bill was rediculas. I moved there late spring when fall came and i took the air out of the front window didnt fit the window frame causes my gas bill to really hit the roof. Top it off the 3rd bedroom which was really small i wanted to use as a little office sp my 10 yr old has a privite area to get away from her sisters to be able to focus on school work. When I start cleaning out the i pick this huge board up of the floor and under it was a hole so big and deep”

2. Anonymous said... on Sep 10, 2013 at 10:26AM

“Continuance.... A hole so deep u saw the basement. People will say why not just move but as a single mother of 3 its pretty hard. So i called L&i , he failed so many things some I wasn't aware were a violation. L&i gave him 30 days to fix everything all he did was glue wood over the hole nothing else so he failed again. I was told stop payn rent put it in escrow. So of he took me to court to sue me, I went there with pictures n lables of everything, the L&i report of him failing twice , and his expired license he thought I probably wouldve never thought to check. In the end the judge lowered my rent all the to just $350 and I owed him nothing because the expired license and didn't have to pay till ot got renewed. I don't know how other counties and states are but Philadelphia really helps you especially people like me raising kids on ur own living check to check.”

3. Anonymous said... on Jun 4, 2014 at 02:01AM

“Moved in my home 2009 found out 2014 after shut off notice from water department that my landlord rental license expired 2007 & no inspection since 2004. My landlord wants to evict me because I put her rent in escrow until I get confirmation from the water department that she paid $2800.00 water bill.”

4. Anonymous said... on Jun 4, 2014 at 02:04AM

“Add to previous comment I posted I am also a single mother of two autistic sons.”

5. Stephan said... on Nov 19, 2014 at 05:02PM

“My landlord live in maryland and owns property in rochester ny. All of her leases agreements are a mixture of maryland laws, home owner association, condominium, and made up rules with excessive fees and charges such as 10% late fees and $800 a yr pet fees, $200 smoker fees although smoking is not allowed on the property. Is this a legal lease?”

6. Anonymous said... on Dec 11, 2014 at 10:28PM

“I started renting my house in July 2014. And there are many things that needed to get fix. My landlord makes no effort to fix anything. She comes up with many excuses. But on the first of each month my landlord is knocking on my door to collect rent always around eight am and refuse money orders. When asked about fixing the problems my landlord would say I'll fix it later. So I finally could not take it anymore and call building code. The house was inspected and so many problems were found ( sewer pipe leaking, electrical panel box, no railings on the second floor porch and so much more.) Also the city code department found out my landlord has never registered the property and has no building license which is required in Pennsylvania. My question is can she collect rent without a housing license?”